Peter Vinden, Managing Director of Gateley vinden, examines when a collateral guarantee is not considered a construction contract
Indirect guarantees are a reality in the construction industry. A guarantee constitutes a contractual bond between two parties, mainly to allow a beneficiary of the guarantee to act in the event of a problem. Thus, employers will generally insist on obtaining warranty guarantees from major subcontractors on a project, especially if these major subcontractors were involved in the design.
Section 104 of the Housing, Construction and Regeneration Subsidies Act 1996 (“the Act”) defines construction contracts:
(1) In this Part, a “construction contract” means an agreement with a person for any of the following:
a) carrying out construction operations;
(b) organize the execution of construction works by third parties, whether subcontracted with him or otherwise;
c) supply its own labor or the labor of others for the execution of the construction work.
(2) References in this part to a construction contract include an agreement—
(a) to carry out architectural, design or surveying work, or
(b) advise on construction, engineering, interior or exterior decoration or landscaping, in connection with construction operations.
If a contract is a “construction contract” as defined in section 104 of the Act, there is an implied right to submit to arbitration at any time any dispute arising out of such a contract.
In Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd  EWHC 2665 (TCC), Justice Akenhead concluded that the parties’ collateral security was a construction contract. Parkwood had the statutory right to refer his dispute with Laing to arbitration.
It seems that the central element of the court’s decision in that case was the use of particular words in the guarantee which indicated that Laing “warrants, acknowledges and undertakes” to various things, including that she would perform the work in accordance with the construction contract. The court concluded that these words meant that the document was not only a guarantee or guarantee of a past state of affairs, but that it also applied to work that Laing had not yet carried out in this regard. which concerns the underlying construction contract.
However, in Toppan Holdings Limited and another against Simply Construct (UK) LLP  EWHC 2110 (TCC) (“The Toppan case”), the court provided further guidance on whether a decision can be made under collateral security. It now appears that the answer to this question depends a lot not only on the specific wording of the guarantee, but also on when the guarantee is enforced.
In the Toppan case, the court ruled that a collateral guarantee executed after the completion of the work was not a construction contract and, therefore, the arbitrator had no jurisdiction in either of the two disputes. that were submitted to him. The court refused to enforce one of the arbitrator’s decisions on which summary judgment was requested.
Background to the Toppan case
Toppan Holdings Limited (“Toppan”) is the full owner of a luxury care home in London (“Care Home”) built by Simply Construct (UK) LLP (“Simply”). After completion of the works, the construction contract for Simply was assigned to Toppan, which established a contractual relationship between these parties. The care home was leased to the tenant operator, Abbey Healthcare (Mill Hill) Limited (“Abbey”). An ancillary guarantee for the benefit of the tenant was not obtained from Simply at the time Abbey began its lease.
After the completion of the work and the opening of the Nursing Home, construction defects were identified, requiring repair work. Some losses resulting from the repair of defects were suffered by Toppan as owner and other losses were suffered by Abbey as lessee. This meant that Toppan and Abbey needed a contractual relationship to pursue their respective losses.
Because the construction contract had been innovated at Toppan, she had a direct recourse to settle her dispute with Simply. However, there was no contractual relationship between Simply and Abbey. Toppan subsequently exercised his right to require Simply to enter into a collateral guarantee in favor of Abbey.
Toppan and Abbey then started in parallel judgments against Simply for the recovery of their respective losses in separate proceedings. The same arbitrator was appointed to handle both disputes and decisions were rendered in both proceedings on April 30, 2021.
Simply did not pay on any of the decisions and the plaintiffs initiated joint enforcement proceedings against Simply in the Technology and Construction Tribunal (TCC). Simply defended Abbey’s claim on grounds of jurisdiction, namely that the collateral guarantee was not a construction contract within the meaning of the Law and that the right to adjudicate therefore did not apply.
The Court noted that although the collateral guarantee concerned past and future construction operations, it had not been executed before the practical completion, but only following the discovery of hidden defects which had been corrected. Whereas in Park wood, Akenhead J noted that:
- a construction contract can have retroactive effect while still falling within the scope of the Act – it does not need to be “fully or partially prospective”;
- the Act was intended by Parliament to provide a broad definition of “construction contracts” subject to the Act; and
- where the contract is for the “execution and completion” of construction operations, it will invariably fall under the Act.
These comments had been tempered by his statement that a pointer to an ancillary warranty being a construction contract is that “all work is completed and the contractor simply justifies a past state of affairs as reaching a certain level, quality or standard”.
The timing of performance was the key to the conclusion in this case that the collateral security was not a construction contract subject to the Act. Although express language was included with respect to future construction operations, collateral security could not relate to future construction operations as executed. after Practical completion.
Although the collateral guarantee confirmed that Abbey did not acquire more rights under the collateral guarantee than those that would be available under the construction contract, this did not mean that equivalent rights extended to a right. to rule.
As a result, the court refused to enforce the award decision in Abbey’s favor.
The Toppan case makes it clear that the court will consider the time of performance of the warranty as a crucial factor, as well as the terms of the document, in deciding whether the collateral warranty is a construction contract.
If the warranty is executed where there is still unfinished work, this will be a “very strong indicator” that the agreement falls under the construction law. But, if the warranty is executed after the completion of the work, even with hidden defects that have been repaired, then the warranty is “unlikely” to be a construction contract.
I understand that Toppan has filed a request to appeal the judgment and therefore more guidance and clarity from the court is expected in the coming months.
Obviously, the judgment in the Toppan case will have caused some uncertainty for the beneficiaries of collateral guarantees, legal advisers and the construction industry as a whole. Until this uncertainty is resolved, one way or another, it would appear that a reasonable path would be to introduce a contractual right to adjudicate as an express condition of the collateral guarantee.
For more information or an informal discussion on collateral guarantees or construction contracts in general, please contact us.
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